Morgan Stanley Dean Witter is forecasting a late rally in European stocks that could push equity markets between 10 and 15 per cent higher by the year's end.

The US investment bank sees a correction next year, however.

A year-end rally can be significant if it makes the difference between positive and negative absolute performance numbers for the year, the brokers explain.

Polls it has carried out show that most investors believe European equity markets will recover next year and are willing to look beyond short-term weakness.

Looking at the various sectors, the group favours financial stocks, although not those that have an exposure to the US market or investment banks.

European or domestically focused banks look like the safest bet so long as there is no recession - which is not expected. It also likes cable and wireless plays and utilities, highlighting stocks such as Suez Lyonnaise, E.ON and ScottishPower. Food and drink equities also look cheap, particularly Tesco and Danone, it says.

By contrast, cyclical and pharmaceutical stocks are categorised as carrying most risk for investors. The US political cycle, rising research and development spending, and patent expiries all pose non-economic risks to the sector, it states.